The Fed is reluctant to cut rates as the US economy continues to remain resilient. However, the longer rates remain high, credit risks grow, with the US regional banks at the line of fire.
I'm thankful there are very intelligent people like you who can break this down for people like me who are very ignorant about it. You make it so much easier to understand.
Than you Amrita, your post was worth waiting for today. Like always you explain finances in away exciting to the lay person unfamiliar with economic terminology. Especially I grasp onto your positive hopefulness. The world of finance is anything except boring in these times. You have an electrifying way of telling it!
Thank you so so much for such kind words Charlotte. It makes me super fulfilled when I can explain jargony stuff in simple language, especially when it affects us all in the society. Thank you again for your constant support.
The rate hike strategy pursued by Jay Powell to restrain inflation was always going to lead to a liquidity crisis. The theoretical underpinnings of the strategy require this eventual outcome.
The current situation is further exacerbated by Wall Street banks realizing the liquidity threats that the Fed strategy entail, but refusing to do anything to protect themselves.
Ultimately, the end result of the Fed's financial machinations is always the same: moral hazard and eventual bailout of the banking system.
We saw that in the 80s with the S&L crisis. We saw that in the 90s with LTCM. We saw that in 2008-2009 with the Great Financial Crisis. We saw that last year with SVB and First Republic Bank.
When the next wave of bank failures hits, we may be reasonably certain that the Fed will orchestrate a bailout of the affected banks for the sake of the banking system. Because they have done so multiple times before.
(Here's a brief overview of the Long-Term Capital Management bailout:
Well, Janet Yellen had pointed several times that bank consolidation won't be a bad idea, fewer banks, concentration of power. As for Powell, his goals are to manage inflation and employment, while managing banking stability. So, while the current situation is terribly threatening for small regional banks, the Fed will likely not hold any accountability as big banks flush with cash will absorb assets of failed banks, should some form of regional banking contagion take place.
That is the problem, I don't trust the motive of the Fed. Big banks are easier to control and will serve the Fed. Small banks are more likely to serve their customers and community. As you noted, smaller banks primarily serve smaller businesses, which big government seems to detest.
What a brilliant post, Amrita. This was definitely worth the wait. I learnt many new things in macroeconomics. The Reserve Bank of India is also less likely to bring down interest rates. Though inflation has certainly decreased here, it hasn't reached RBI target of 4%. I assume, that the trend must be similar on a global scale. Smaller businesses are likely to bear the brunt of prolonged high interest rates. Save the economy as a whole or save a few small businesses? Tough choices, I must say.
Thanks Sanuj, I am so glad that you liked the post. The beauty with a lot of these concepts is that it applies to nations at a scale, though of course the US always had an advantage with its reserve currency status.
From my basic understanding of what's happening in India, there has been a significant push towards bank consolidation as well, am I correct? As far as I follow, India GDP is expected to grow robustly, so do you think there will be further election related pressures to drop rates?
Yes. Many bank consolidations have happened in the recent past.
I doubt that there will be pressure to drop rates before elections. As far as I understand, the RBI functions autonomously with occasional inputs from the government. They've been doing a decent job with regards to tackling inflation. The Indian market hasn't received the delay in interest rate cuts very well.
A complex topic, worth reading. I don't want to be in the shoes of the FED, no matter what they do, someone will lose. And whom they push to the loser side will tell the real story. Great post Amrita. Very well done!
Thanks Michael, glad you enjoyed it. Precisely, whatever the decision of the Fed, there are going to be winners and losers. Though, the ones on the winning side are always the deep-pocketed players.
This is an excellent piece and shows a robust understanding of monetary plumbing. Doomberg’s piece this morning adds the dimension of the cost of primary energy as a key variable in the economy. Would be interesting to integrate this aspect, along with fiscal policy, into the whole picture.
Thank you, I am going to give Doomberg's latest piece a read, it is indeed a great suggestion to integrate energy economics into this, will look to do more research on it.
Nice work Amrita, as always! I too am passionate about this topic. To me, there is no question that inflation will be reignited. But the big trade off is not between regional banks and inflation. As I laid out in my post last month:
the ultimate trade-off is between the US Treasury Market and the US Dollar. And the Fed has already proved they will do whatever it takes to keep the US Treasury market functioning (which means keep our government funded) and they will sacrifice the US Dollar in the process - which means inflation. Regional banks? A small sacrifice (and price) compared to what this will ultimately cost all of us.
Excellent essay. Thanks. Regarding your poll, I've been trying to explain to friends the significance of the inverted yield curve (in my case the NZ one) for over a year now. Perhaps you'll do a better job. Turns out most people can't read charts.
Thank you. I will certainly do a post on yield curve soon, so far, looking at the results from the poll, the votes are skewing towards "emerging markets", but I do find the concept of yield curves fascinating.
Awesome post!
Thanks Rocky, glad you enjoyed it.
I agree
I'm thankful there are very intelligent people like you who can break this down for people like me who are very ignorant about it. You make it so much easier to understand.
Thank you Debbie for your kind words. I am always looking to make finance more accessible to all, and I am glad you found the post useful.
Than you Amrita, your post was worth waiting for today. Like always you explain finances in away exciting to the lay person unfamiliar with economic terminology. Especially I grasp onto your positive hopefulness. The world of finance is anything except boring in these times. You have an electrifying way of telling it!
Thank you so so much for such kind words Charlotte. It makes me super fulfilled when I can explain jargony stuff in simple language, especially when it affects us all in the society. Thank you again for your constant support.
Sending you warm blessings and have a fabulous week! 🤗💖
Thank you Charlotte!!! Have a blessed week too.
💞💫💞
For anyone interested, here are my estimates for today's CPI report:
https://open.substack.com/pub/arkominaresearch/p/jan-2024-cpi-estimates?r=1r1n6n&utm_campaign=post&utm_medium=web&showWelcomeOnShare=true
Thank you Marko for sharing this.
You are welcome Amrita.
As I wrote in September of 2022, the Federal Reserve has always faced this dilemma, even if it has failed to realize it.
https://newsletter.allfactsmatter.us/p/powells-paradox-curing-inflation
The rate hike strategy pursued by Jay Powell to restrain inflation was always going to lead to a liquidity crisis. The theoretical underpinnings of the strategy require this eventual outcome.
The current situation is further exacerbated by Wall Street banks realizing the liquidity threats that the Fed strategy entail, but refusing to do anything to protect themselves.
https://newsletter.allfactsmatter.us/p/wall-street-knows-the-crash-is-coming
We saw a small example of what lies ahead in March of 2023, with the collapse of Silvergate, Silicon Valley Bank, and then First Republic Bank.
https://newsletter.allfactsmatter.us/p/silvergate-capital-and-svb-how-a
NYCB is a none too subtle reminder that all of the banking weaknesses we saw on display last year are still very much with us.
Thanks Peter for pointing me to your posts.
Interesting perspective
Ultimately, the end result of the Fed's financial machinations is always the same: moral hazard and eventual bailout of the banking system.
We saw that in the 80s with the S&L crisis. We saw that in the 90s with LTCM. We saw that in 2008-2009 with the Great Financial Crisis. We saw that last year with SVB and First Republic Bank.
When the next wave of bank failures hits, we may be reasonably certain that the Fed will orchestrate a bailout of the affected banks for the sake of the banking system. Because they have done so multiple times before.
(Here's a brief overview of the Long-Term Capital Management bailout:
https://www.investopedia.com/terms/l/longtermcapital.asp )
I see
No way this could be a deliberate play to reduce the number of small banks?
Well, Janet Yellen had pointed several times that bank consolidation won't be a bad idea, fewer banks, concentration of power. As for Powell, his goals are to manage inflation and employment, while managing banking stability. So, while the current situation is terribly threatening for small regional banks, the Fed will likely not hold any accountability as big banks flush with cash will absorb assets of failed banks, should some form of regional banking contagion take place.
That is the problem, I don't trust the motive of the Fed. Big banks are easier to control and will serve the Fed. Small banks are more likely to serve their customers and community. As you noted, smaller banks primarily serve smaller businesses, which big government seems to detest.
You got it!!
Capitalist empire tends to monopolies as those mesh better with the empire
Sort of a symbiotic relationship
Unfortunately empires always eat their children or as some say eat their seed corn
Seems we are in the end stage now
Very nice Amrita ! I especially like the US Regional Bank graphic.
Thanks Greg. Are you talking about the meme?
Yes, and the whole post is beautifully written.
🙏🏼🙏🏼
Appreciate your effort to explain it in very single layman language. Perhaps it also shows your deeper understanding of subject
Thank you Prakash, just sharing what I learn along the way. Glad you enjoyed the post.
What a brilliant post, Amrita. This was definitely worth the wait. I learnt many new things in macroeconomics. The Reserve Bank of India is also less likely to bring down interest rates. Though inflation has certainly decreased here, it hasn't reached RBI target of 4%. I assume, that the trend must be similar on a global scale. Smaller businesses are likely to bear the brunt of prolonged high interest rates. Save the economy as a whole or save a few small businesses? Tough choices, I must say.
Thanks Sanuj, I am so glad that you liked the post. The beauty with a lot of these concepts is that it applies to nations at a scale, though of course the US always had an advantage with its reserve currency status.
From my basic understanding of what's happening in India, there has been a significant push towards bank consolidation as well, am I correct? As far as I follow, India GDP is expected to grow robustly, so do you think there will be further election related pressures to drop rates?
Yes. Many bank consolidations have happened in the recent past.
I doubt that there will be pressure to drop rates before elections. As far as I understand, the RBI functions autonomously with occasional inputs from the government. They've been doing a decent job with regards to tackling inflation. The Indian market hasn't received the delay in interest rate cuts very well.
A complex topic, worth reading. I don't want to be in the shoes of the FED, no matter what they do, someone will lose. And whom they push to the loser side will tell the real story. Great post Amrita. Very well done!
Thanks Michael, glad you enjoyed it. Precisely, whatever the decision of the Fed, there are going to be winners and losers. Though, the ones on the winning side are always the deep-pocketed players.
This is an excellent piece and shows a robust understanding of monetary plumbing. Doomberg’s piece this morning adds the dimension of the cost of primary energy as a key variable in the economy. Would be interesting to integrate this aspect, along with fiscal policy, into the whole picture.
Thank you, I am going to give Doomberg's latest piece a read, it is indeed a great suggestion to integrate energy economics into this, will look to do more research on it.
Nice work Amrita, as always! I too am passionate about this topic. To me, there is no question that inflation will be reignited. But the big trade off is not between regional banks and inflation. As I laid out in my post last month:
https://thexproject.substack.com/p/everyone-is-missing-the-point-about-5dc
the ultimate trade-off is between the US Treasury Market and the US Dollar. And the Fed has already proved they will do whatever it takes to keep the US Treasury market functioning (which means keep our government funded) and they will sacrifice the US Dollar in the process - which means inflation. Regional banks? A small sacrifice (and price) compared to what this will ultimately cost all of us.
Fully agree, regional banks are a small price to pay to ensure stability of the overall funding system. As for the tradeoff, couldn't agree more.
Wow Amrita. Great job.
P.s. I voted option 2, but I meant option 1.
Thanks Gianni. Glad you liked the post. Thanks for your vote, if I understand correctly, you wanted to vote the topic of "yield curves" correct?
Yes, thanks
Excellent essay. Thanks. Regarding your poll, I've been trying to explain to friends the significance of the inverted yield curve (in my case the NZ one) for over a year now. Perhaps you'll do a better job. Turns out most people can't read charts.
https://craighutchinson.substack.com/p/new-zealands-seven-deadly-sins
Thank you. I will certainly do a post on yield curve soon, so far, looking at the results from the poll, the votes are skewing towards "emerging markets", but I do find the concept of yield curves fascinating.
Thank you Amrita! Love the illustrations for QE and QT. Very insightful article.
Thank you Jacques, glad you enjoyed the post.
I swear I 'liked' this when I restacked it... guess not 🤦🏻 Sorry about that 🙃
Thanks Stone, you are way too kind.